EPLUS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our 2022 Annual Report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “ Risk Factors ,” in our 2022 Annual Report, as supplemented in subsequently filed reports, and in Part II, Item 1A. “ Risk Factors ” in this Report. EXECUTIVE OVERVIEW BUSINESS DESCRIPTION We are a leading solutions provider in the areas of security, cloud, networking, data center, collaboration, and emerging technologies. We deliver actionable outcomes for organizations by using information technology (“IT”) and consulting solutions to drive business agility and innovation. Leveraging our engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with our customers’ needs. Our expertise and experience enable us to craft optimized solutions that take advantage of the cost, scale, and efficiency of private, public and hybrid cloud in an evolving market. As part of our solutions, we provide consulting, professional services, managed services, IT staff augmentation, and complete lifecycle management. Additionally, we offer flexible financing for purchases from us and from third-parties. We have been in the business of selling, leasing, financing, and managing IT and other assets for more than 30 years. Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-premise and in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, and then design, deploy, and manage solutions aligned to their objectives. Underpinning the broader areas of Cloud, Security, Networking, Data Center, and Collaboration are specific skills in orchestration and automation, application modernization, DevOps, data management, data visualization, analytics, network modernization, edge compute and other advanced and emerging technologies. These solutions are comprised of class-leading technologies from partners such as Amazon Web Services, Arista Networks, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, F5 Networks, Fortinet, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Rubrik, Splunk, Varonis, and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets. Our scale and financial resources have enabled us to continue investing in engineering and technology resources to stay on the forefront of technology trends. Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services, has enabled e Plus to remain a trusted advisor for our customers. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a customized customer experience that spans the continuum from fast delivery of competitively priced products and services to subsequent management and maintenance, and through to end-of-life disposal services. This approach permits e Plus to deploy sophisticated solutions enabling our customers’ business outcomes. Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. We serve customers in markets including telecom, media and entertainment, technology, state and local government and educational institutions (“ SLED”), healthcare, and financial services. We sell to customers in the United States (“US”), which accounts for most of our sales, and to customers in select international markets including the United Kingdom (“UK”), the European Union (“EU”), India, and Singapore . Our technology segment accounted for 98% of our net sales and 88% of our operating income, while our financing segment accounted for 2% of our net sales and 12% of our operating income, for the three months ended June 30, 2022. 24 Table of Contents BUSINESS TRENDS We believe the following key factors are impacting our business performance and our ability to achieve business results: • General economic concerns including inflation, rising interest rates, staffing shortages, COVID variants, and global unrest may impact our customers’ willingness to spend on technology and services. • A worldwide shortage of certain IT products is resulting from, among other things, shortages in semiconductors and other product components. Like others, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, the costs of products, vendor return and cancellation policies, and our ability to meet customer demands. We continue to work closely with our suppliers to further mitigate disruptions outside our control. Despite these actions, we believe extended lead times will likely persist for at least the next few quarters. • We are experiencing increases in prices from our suppliers as well as rising wages and interest rates. We generally have been able to pass price increases to our customers. Our labor costs related to services we perform will take longer to pass to customers that have services engagements where prices may be set. Our financing quotes are generally indexed to market changes to enable us to change rates from time of quote to funding. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds and lock in our profit on the transaction. There can be no assurances that inflation will not have a material impact on our sales, gross profit, or operating costs in the future. • Customers’ top focus areas include security, cloud solutions, hybrid work environments (work from home and return to office) as well as digital transformation and modernization. We have developed advisory services, solutions, and professional and managed services to meet these priorities and help our customers attain their desired state. • Modernizing legacy applications, data modernization, reducing operational complexity, securing workloads, the cost and performance of IT operations, and agility are changing the way companies are purchasing and consuming technology. These are fueling deployments of solutions on cloud, managed services and hybrid platforms and licensing models. KEY BUSINESS METRICS Our management monitors several financial and non-financial measures and ratios on a regular basis to track the progress of our business. We believe that the most important of these measures and ratios include net sales, gross margin, operating income margin, net earnings, net earnings per common share, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross billings, and Non-GAAP Net earnings per share. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets. These key indicators include financial information that is prepared in accordance with US GAAP and presented in our unaudited consolidated financial statements, as well as Non-GAAP performance measurement tools. Generally, a Non-GAAP financial measure is a numerical measure of a company’s performance or financial position that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Our key business metrics for the three month periods ended June 30, 2022, and 2021 are summarized in the following tables (dollars in thousands): 25 Table of Contents Three Months Ended June 30, Consolidated 2022 2021 Net sales $ 458,359 $ 416,649 Gross profit $ 113,523 $ 105,512 Gross margin 24.8 % 25.3 % Operating income margin 7.2 % 7.8 % Net earnings $ 22,339 $ 23,518 Net earnings margin 4.9 % 5.6 % Net earnings per common share - diluted $ 0.84 $ 0.87 Non-GAAP: Net earnings (1) $ 26,513 $ 26,353 Non-GAAP: Net earnings per common share - diluted (1) $ 0.99 $ 0.98 Adjusted EBITDA (2) $ 38,304 $ 38,272 Adjusted EBITDA margin 8.4 % 9.2 % Technology Segment Net sales $ 448,785 $ 400,358 Adjusted gross billings (3) $ 701,943 $ 633,007 Gross profit $ 105,651 $ 95,433 Gross margin 23.5 % 23.8 % Operating income $ 29,219 $ 25,223 Adjusted EBITDA (2) $ 34,254 $ 30,958 Financing Segment Net sales $ 9,574 $ 16,291 Gross profit $ 7,872 $ 10,079 Operating income $ 3,964 $ 7,229 Adjusted EBITDA (2) $ 4,050 $ 7,314 (1) Non-GAAP Net earnings and Non-GAAP Net earnings per common share – diluted is based on net earnings calculated in accordance with GAAP, adjusted to exclude other income (expense), share-based compensation, and acquisition and integration expenses, and the related tax effects. We use Non-GAAP Net earnings per common share as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income and acquisition-related amortization expense in calculating Non-GAAP Net earnings per common share provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Non-GAAP Net earnings per common share provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Non-GAAP information as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate similar Non-GAAP Net earnings and Non-GAAP Net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures. 26 Table of Contents Three Months Ended June 30, 2022 2021 GAAP: Earnings before tax $ 31,030 $ 32,575 Share based compensation 1,773 1,735 Acquisition related amortization expense 2,183 2,696 Other (income) expense 2,153 (123 ) Non-GAAP: Earnings before provision for income taxes 37,139 36,883 GAAP: Provision for income taxes 8,691 9,057 Share based compensation 508 496 Acquisition related amortization expense 617 757 Other (income) expense 616 (35 ) Tax benefit on restricted stock 194 255 Non-GAAP: Provision for income taxes 10,626 10,530 Non-GAAP: Net earnings $ 26,513 $ 26,353 Three Months Ended June 30, 2022 2021 GAAP: Net earnings per common share - diluted $ 0.84 $ 0.87 Share based compensation 0.04 0.05 Acquisition related amortization expense 0.06 0.07 Other (income) expense 0.06 - Tax benefit on restricted stock (0.01 ) (0.01 ) Total non-GAAP adjustments - net of tax 0.15 0.11 Non-GAAP: Net earnings per common share - diluted $ 0.99 $ 0.98 (2) We define Adjusted EBITDA as net earnings calculated in accordance with GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other income. Segment Adjusted EBITDA is defined as operating income calculated in accordance with GAAP, adjusted for interest expense, share-based compensation, acquisition and integration expenses, and depreciation and amortization. We consider the interest on notes payable from our financing segment and depreciation expense presented within cost of sales, which includes depreciation on assets financed as operating leases, to be operating expenses. As such, they are not included in the amounts added back to net earnings in the Adjusted EBITDA calculation. We provide below a reconciliation of Adjusted EBITDA to net earnings, which is the most directly comparable financial measure to this Non-GAAP financial measure. Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by net sales. The presentation of Adjusted EBITDA has been changed from prior period presentations to include adjustments for expenses related to acquisitions such as legal, accounting, tax, and adjustments to the fair value of contingent purchase price consideration as well as stock compensation. We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures. 27 Table of Contents Three Months Ended June 30, Consolidated 2022 2021 Net earnings $ 22,339 $ 23,518 Provision for income taxes 8,691 9,057 Share based compensation 1,773 1,735 Interest and financing costs 138 159 Depreciation and amortization 3,210 3,926 Other income (expense) 2,153 (123 ) Adjusted EBITDA $ 38,304 $ 38,272 Technology Segment Operating income $ 29,219 $ 25,223 Depreciation and amortization 3,182 3,898 Share based compensation 1,715 1,678 Interest and financing costs 138 159 Adjusted EBITDA $ 34,254 $ 30,958 Financing Segment Operating income $ 3,964 $ 7,229 Depreciation and amortization 28 28 Share based compensation 58 57 Adjusted EBITDA $ 4,050 $ 7,314 (3) We define Adjusted gross billings as our technology segment net sales calculated in accordance with US GAAP, adjusted to exclude the costs incurred related to sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. We have provided below a reconciliation of Adjusted gross billings to technology segment net sales, which is the most directly comparable financial measure to this Non-GAAP financial measure. Three Months Ended June 30, 2022 2021 Technology segment net sales $ 448,785 $ 400,358 Costs incurred related to sales of third party maintenance, software assurance and subscription/SaaS licenses, and services 253,158 232,649 Adjusted gross billings $ 701,943 $ 633,007 We use Adjusted gross billings as a supplemental measure of our performance to gain insight into the volume of business generated by our technology segment, and to analyze the changes to our accounts receivable and accounts payable. Our use of Adjusted gross billings as an analytical tool has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted gross billings or a similarly titled measure differently, which may reduce its usefulness as a comparative measure. 28 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS Net sales for the three months ended June 30, 2022, increase d $41.7 million, or 10.0%, to $458.4 mill ion, as compared to $416.6 million for the same period in the prior year. Product sales for the three months ended June 30, 2022, increase d $34.2 million, or 9.5%, to $395.3 million, as compared to $361.1 million for the same period in the prior year , due to increased demand and higher prices for some products in our technology segment. Service sales for the three months ended June 30, 2022, increas ed $7.5 million, or 13.5%, to $63.1 million, as compared to $55.6 m illion for the same period in the prior year, due to increases in both managed services and professional services. In the technology segment, we had increases in net sales to customers in telecom, media, and entertainment, healthcare, and professional services, which were partially offset by decreases in net sales to customers in manufacturing during the three months ended June 30, 2022, compared to the same period in the prior year. Adjusted gross billings for the three months ended June 30, 2022, increased $68.9 million, or 10.9%, to $701.9 million, as compared to $633.0 million for the same period in the prior year. We had increases in adjusted gross billings to customers in telecom, media and entertainment, healthcare, financial services, professional services, and SLED, which were partially offset by decreases in adjusted gross billings to customers in the manufacturing market. Consolidated gross profit for the three months ended June 30, 2022, increased $8.0 million, or 7.6%, to $113.5 million, as compared to $105.5 million for the same period in the prior year. Our increase in gross profit was due to higher net sales, offset by lower gross margin. Consolidated gross margins for the three months ended June 30, 2022, decreased 50 basis points to 24.8%, as compared to 25.3% for the same period in the prior year. Our decrease in gross margins was primarily due to a decrease in service margins, and a reduction in gross profit from our financing segment. Operating expenses for the three months ended June 30, 2022, increased $7.3 million, or 10.0%, to $80.3 million, as compared to $73.1 million for the same period in the prior year. Our increase in operating expenses was primarily due to $4.0 million in higher salaries and benefits, $3.1 million in higher general and administrative expenses including higher software license and maintenance fees and higher travel and entertainment costs, $1.0 million in a higher provision for credit losses caused by an increase in our receivables over this period compared to a decrease in our receivables over the same period in the prior year, and offset by a $0.7 million decrease in depreciation and amortization. As of June 30, 2022, we had 1,637 employees, an increase of 90 from 1,547 as of June 30, 2021. As a result of the foregoing, operating income for the three months ended June 30, 2022, increased $0.7 million, or 2.3% , to $33.2 million, as compared to $32.5 millio n for the same period in the prior year. Consolidated net earnings for the three months ended June 30, 2022, decreased $1.2 millio n, or 5.0%, to $22.3 million, as compared to $23.5 million for the same period in the prior year, due to the increase in operating expenses and foreign exchange losses, offset by an increase in gross profit. Our effective tax rate for the three months ended June 30, 2022, was 28.0%, which is comparable to 27.8% in the prior year quarter. Adjusted EBITDA for both the three months ended June 30, 2022, and 2021 was $38.3 million. Adjusted EBITDA margin for the three months ended June 30, 2022, decreased 80 b asis points to 8.4% , as compared to the prior year period of 9.2%. Diluted earnings per share for the three months ended June 30, 2022, decreased $0.03, or 3.4%, to $0.84 per share, as compared to $0.87 per share for same period in the prior year. Non-GAAP diluted earnings per share for the three months ended June 30, 2022, increased $0.01, or 1.0%, to $0.99, as compared to $0.98 for the same period in the prior year. Cash and cash equivalents decreased $71.9 million, or 46.3%, to $83.5 million as of June 30, 2022 , as compared to $155.4 million as of March 31, 2022. Our decrease in cash and cash equivalents was due to increases in our accounts receivable and inventory, partially offset by borrowings on our revolving credit facility. Additional uses of cash during the three months ended June 30, 2022 , included cash paid of $7.2 million to repurchase outstanding shares of our common stock as part of our share repurchase plan and to satisfy the minimum tax withholding requirements on employee stock awards . 29 Table of Contents SEGMENT OVERVIEW Our operations are conducted through two segments: technology and financing. TECHNOLOGY SEGMENT Our technology segment earns revenues from sales of IT products, professional services, managed services, and staff augmentation. Our technology segment sells primarily to corporations, state and local governments, and higher education institutions. We sell across the US, which accounts for most of our sales, and in select international markets. Our technology segment also provides business-to-business supply chain management solutions for IT products. Our customers generally purchase IT products and services from us under the terms and conditions of a customer master agreement (“CMA”). Our customers generally place orders for IT products using purchase orders. Customer orders from state and local governments may involve public bids and our written bid responses. Our customers generally purchase services from us under the terms of statements of work. Our charges for services may be fixed price or determined on time and materials. We purchase IT products for resale from vendors and distributors. Our relationships with vendors are generally governed by our reseller authorization level. We achieve these authorization levels through purchase volume, certifications held by sales executives or engineers, and though contractual commitments. Our authorization level determines the types of products we can resell, variable discounts applied against the list price, funds provided for the marketing, and other special promotions. We endeavor to minimize our cost of sales through vendor incentive programs. Our benefit from these programs is also determined by our reseller authorization level. These authorization levels are costly to maintain and vendors often change their incentive programs. As such, our ability to continue to reduce our costs of sales through participating in these programs is not guaranteed. FINANCING SEGMENT Our financing segment offers financing solutions to corporations, state and local governments, and higher education institutions. We provide financing across the US , which accounts for most of our sales, and in select international markets . Our financing segment earns revenues from leasing IT equipment, from financing purchases of third-party software licenses, software assurance, maintenance, and other services, and from selling IT equipment at the end of a lease. Our financing revenue is generally earned from the following three sources: Financing revenue generally falls into the following three categories: • Portfolio income: Interest income from financing receivables and rents due under operating leases • Transactional gains: Net gains on the sale of financial assets • Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and sales of off-lease equipment. FLUCTUATIONS IN OPERATING RESULTS Our operating results may fluctuate due to customer demand for our products and services, supplier costs, product availability, changes in vendor incentive programs, interest rate fluctuations, the timing of sales of financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized for leased equipment. We expect to continue to expand by opening new offices and warehouses and by hiring additional staff for specific targeted market areas whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may impact our operating results. CRITICAL ACCOUNTING ESTIMATES Our critical accounting estimates have not changed from those reported in Item 7 , “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report. 30 Table of Contents SEGMENT RESULTS OF OPERATIONS The three months ended June 30, 2022, compared to the three months ended June 30, 2021 TECHNOLOGY SEGMENT The results of operations for our technology segment were as follows (dollars in thousands): Three Months Ended June 30, Change 2022 2021 Net sales Product $ 385,676 $ 344,766 $ 40,910 11.9 % Services 63,109 55,592 7,517 13.5 % Total 448,785 400,358 48,427 12.1 % Cost of sales Product 302,508 271,015 31,493 11.6 % Services 40,626 33,910 6,716 19.8 % Total 343,134 304,925 38,209 12.5 % Gross profit 105,651 95,433 10,218 10.7 % Selling, general, and administrative 73,112 66,153 6,959 10.5 % Depreciation and amortization 3,182 3,898 (716 ) (18.4 %) Interest and financing costs 138 159 (21 ) (13.2 %) Operating expenses 76,432 70,210 6,222 8.9 % Operating income $ 29,219 $ 25,223 $ 3,996 15.8 % Adjusted gross billings $ 701,943 $ 633,007 $ 68,936 10.9 % Adjusted EBITDA $ 34,254 $ 30,958 $ 3,296 10.6 % Net sales : Net sales for the three months ended June 30, 2022, increased $48.4 million, or 12.1%, to $448.8 million, as compared to $400.4 m illion for the same period in the prior year, due to increases in net sales from customers in telecom, media, and entertainment, healthcare, and professional services, which were partially offset by decreases in net sales to customers in manufacturing. Product sales for the three months ended June 30, 2022, increase d $40.9 million, or 11.9%, to $385.7 million . Service sales for the three months ended June 30, 2022, increas ed $7.5 million, or 13.5%, to $63.1 million, as compared to $55.6 m illion for the same period in the prior year, due to increases in both managed services and professional services. Adjusted gross billings for the three months ended June 30, 2022, increase d $68.9 million, or 10.9%, to $701.9 million, as compared to $633.0 million for the same period in the prior yea r. Our increase in adjusted gross billings was due to higher demand from our current customers and higher prices for some products. We rely on our vendors to fulfill a large majority of shipments to our customers. As of June 30, 2022, we had open orders of $1.0 billion and deferred revenue of $130.7 million. As of June 30, 2021, we had open orders o f $565.8 million and deferred revenue of $100.3 million. 31 Table of Contents We analyze net sales by customer end market and by vendor, as opposed to discrete product and service categories. The percentage of net sales by industry and vendor for the twelve month periods ended June 30, 2022 , and 2021 are summarized below: Twelve Months Ended June 30, Change Net sales by customer end market: 2022 2021 Telecom, Media & Entertainment 29 % 27 % 2 % Healthcare 16 % 13 % 3 % Technology 14 % 16 % (2 %) SLED 14 % 15 % (1 %) Financial Services 9 % 12 % (3 %) All others 18 % 17 % 1 % Total 100 % 100 % Twelve Months Ended June 30, Change Net sales by vendor: 2022 2021 Cisco Systems 37 % 37 % 0 % Dell EMC 10 % 7 % 3 % Juniper Networks 5 % 7 % (2 %) NetApp 5 % 3 % 2 % Arista Networks 2 % 4 % (2 %) All others 41 % 42 % (1 %) Total 100 % 100 % Our revenues by customer end market have remained consistent over the year with over 80% of our revenues generated from customers within the five end markets identified above. During the trailing twelve month period ended June 30, 2022 , we had an increase in the percentage of total revenues from customers in the telecom, media and entertainment and healthcare industry, and decreases in the percentage of total revenues in the financial services, technology, and SLED markets. These changes were driven by changes in customer buying cycles, and the timing of specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers. The majority of our revenues by vendor is derived from our top six suppliers. None of the vendors included within the “All others” category exceeded 5% of total revenues. Cost of sales : Cost of sales for the three months ended June 30, 2022 , increased $38.2 million, or 12.5%, to $343.1 million, as compared to $304.9 m illion for the same period in the prior year. Our gross margin decreased 30 b asis points to 23.5% for the three months ended June 30, 2022 , compared to 23.8% for the same period in the prior year. Our decrease in gross margins was primarily due to higher third-party costs incurred in providing our professional services. Selling, general, and administrative : Selling, general, and administrative expenses for the three months ended June 30, 2022, increased $7.0 million, or 10.5%, to $73.1 million, as compared to $66.2 million for the same period in the prior year. Salaries and benefits increased $3.7 million, or 6.4% to $61.6 million, as compared to $57.9 million for the same period in the prior year, mainly due to an increase in variable compensation. Our technology segment had 1,602 employees as of June 30, 2022 , an increase of 88 from 1,514 as of June 30, 2021 . We added 77 additional customer facing employees, of which 59 were professional services and technical support personnel due to demand for our services. General and administrative expenses for the three months ended June 30, 2022, increased $2.9 million, or 34.6%, to $11.1 million, as compared to $8.3 million for the same period in the prior year, due to higher software license and maintenance fees and higher travel and entertainment costs. 32 Table of Contents Our provision for credit losses for the three months ended June 30, 2022 was $0.3 million, as compared to negligible expense for the same period in the prior year. Our higher provision for credit losses for the three months ended June 30, 2022 was due to changes in our net credit exposure. Depreciation and amortization : Depreciation and amortization for the three months ended June 30, 2022, decreased $0.7 million, or 18.4%, to $3.2 million, as compared to $3.9 mi llion for the same period in the prior year, primarily due to less amortization from intangible assets acquired in past acquisitions as the rate of amortization declines each year. Interest and financing costs : Interest and financing costs of $0.1 million were incurred in the three months ended June 30, 2022, as compared to $0.2 million for the same period in the prior year. Segment operating income : As a result of the foregoing, operating income for the three months ended June 30, 2022 , increased $4.0 million, or 15.8%, to $29.2 million, as compared to $25.2 million for the same period in the prior year. Adjusted EBITDA for the three months ended June 30, 2022, increased $3.3 million, or 10.6%, to $34.3 million, as compared to $31.0 million for the same period in the prior year. FINANCING SEGEMENT The results of operations for our financing segment were as follows (dollars in thousands): Three Months Ended June 30, Change 2022 2021 Net sales $ 9,574 $ 16,291 $ (6,717 ) (41.2 %) Cost of sales 1,702 6,212 (4,510 ) (72.6 %) Gross profit 7,872 10,079 (2,207 ) (21.9 %) Selling, general, and administrative 3,655 2,622 1,033 39.4 % Depreciation and amortization 28 28 - 0.0 % Interest and financing costs 225 200 25 12.5 % Operating expenses 3,908 2,850 1,058 37.1 % Operating income $ 3,964 $ 7,229 $ (3,265 ) (45.2 %) Adjusted EBITDA $ 4,050 $ 7,314 $ (3,264 ) (44.6 %) Net sales : Net sales for the three months ended June 30, 2022, decreased $6.7 m illio n, or 41.2%, to $9.6 mi llion, as compared to $16.3 million for the same period in the prior year. The decrease in net sales was due to lower post contract earnings and transactional gains. For the three months ended June 30, 2022, we recognized net gains on sales of financial assets of $1.8 mi llion and proceeds from these sales were $52.5 million. For the three months ended June 30, 2021, net gains on the sale of financial assets w ere $3.2 million and the proceeds from these sales were $75.3 million. As of June 30, 2022, our financing segment had $130.0 million in financing receivables and operating leases, compared to $141.7 million as of June 30, 2021, a decrease of $11.7 million, or 8.3%. Cost of sales : Cost of sales for the three months ended June 30, 2022, decreas ed $4.5 m illion, or 72.6%, to $1.7 million, as compared to $6.2 million for the same period in the prior year, due to lower cost of sales on off-lease equipment and lower depreciation expense from operating leases. Gross profit decrease d $2.2 million, or 21.9%, to $7.9 million for the three months ended June 30, 2022, as compared to $10.1 million in the prior year. 33 Table of Contents Selling, general and administrative : Selling, general, and administrative expenses for the three months ended June 30, 2022, increased $1.0 million, or 39.4%, to $3.7 million, as compared to $2.6 million for the same period in the prior year, due to higher salaries and benefits consisting mostly of higher variable compensation, higher general and administrative expenses consisting mostly of higher business taxes, and a higher provision for credit losses caused by changes in our net credit exposure. Beginning in the second quarter of our fiscal year 2023, we anticipate completing our deployment of a new hosted software to manage our financing portfolio. Once we begin using the hosted software, we anticipate higher general and administrative costs of approximately $1.5 million per year related to amortizing the cost to implement the hosted software and annual fees paid to license the hosted software. Interest and financing costs : Interest and financing costs for the both the three months ended June 30, 2022, and 2021, were $0.2 million. As of June 30, 2022, our notes payable was $26.4 million, an increase of $11.2 million, or 73.0% compared to notes payable of $15.3 million as of June 30, 2021. As of June 30, 2022, and 2021, our notes payable consisted entirely of non-recourse notes payable. Our weighted average interest rate for non-recourse notes payable was 3.78% and 3.66%, a s of June 30, 2022, and 2021, respectively. Segment operating income : As a result of the foregoing, both operating income and Adjusted EBITDA decrease d $3.3 million to $4.0 million a nd $4.1 million, re spectively, for the three months ended June 30, 2022, as compared to the prior year period. CONSOLIDATED Other income : Other income and expense for the three months ended June 30, 2022, was an expense of $2.2 million, due to foreign exchange losses, compared to income of $0.1 million in the prior year. Income taxes : Our provision for income tax expense was $8.7 million for the three months ended June 30, 2022, as compared to $9.1 million for the same period in the prior year. Our effective income tax rate for the three months ended June 30, 2022, was 28.0%, which is comparable to 27.8% for the same period in the prior year. Net earnings : As a result of the foregoing, our net earnings for the three months ended June 30, 2022, decreased $1.2 million, or 5.0%, to $22.3 million, as compared to $23.5 million during the same period in the prior year. Basic and diluted earnings per common share were both $0.84 for the three months ended June 30, 2022, a decrease of $0.04 and $0.03, respectively, as compared to $0.88 and $0.87, respectively, for the same period in the prior year. Non-GAAP diluted earnings per share for the three months ended June 30, 2022, increased $0.01, or 1.0%, to $0.99, as compared to $0.98 for the three months ended June 30, 2021. Weighted average common shares outstanding was 26.5 million in the calculation of basic earnings per common share for the three months ended June 30, 2022 , and 26.7 million in the calculation of diluted earnings per common share for the three months ended June 30, 2022 . Weighted average common shares outstanding used in the calculation of basic earnings per common share, was 26.7 million for the three months ended June 30, 2021 , and 26.9 million in the calculation of diluted earnings per common share for the three months ended June 30, 2021 . LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY OVERVIEW We finance our operations through funds generated from operations and through borrowings. We use those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock. Our borrowings in our technology segment are primarily through our WFCDF credit facility. Our borrowings in our financing segment are primarily through secured borrowings that involve transferring all or part of the contractual payments due to us to third-party financing institutions. 34 Table of Contents We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be enough to finance our working capital, capital expenditures, and other standard business requirements for at least the next year. Our ability to continue to expand, both organically and through acquisitions, is dependent upon our ability to generate enough cash flow from operations or from borrowing or other sources of financing as may be required. CASH FLOWS The following table summarizes our sources and uses of cash over the periods indicated (in thousands): Three Months Ended June 30, 2022 2021 Net cash used in operating activities $ (102,943 ) $ (65,136 ) Net cash used in investing activities (1,692 ) (6,151 ) Net cash provided by financing activities 31,111 35,494 Effect of exchange rate changes on cash 1,634 71 Net decrease in cash and cash equivalents $ (71,890 ) $ (35,722 ) Cash flows from operating activities : We used $102.9 million in operating activities during the three months ended June 30, 2022, compared to $65.1 million provided by operating activities for the three months ended June 30, 2021. See below for a breakdown of operating cash flows by segment (in thousands): Three Months Ended June 30, 2022 2021 Technology segment $ (104,645 ) $ (65,980 ) Financing segment 1,702 844 Net cash provided by (used in) operating activities $ (102,943 ) $ (65,136 ) Technology segment : For the three months ended June 30, 2022 , our technology segment used $104.6 million from operating activities primarily due to increases in our accounts receivable of $59.1 million and inventories of $92.7 million, offset by net earnings. Further, we had net repayments on the floor plan component of our credit facility of $7.3 million. We use this facility to manage working capital needs, however, we present changes in this balance as financing activity in our consolidated statement of cash flows. In the three months ended June 30, 2021, our technology segment used $66.0 million from operating activities primarily due to increases in our accounts receivable and inventories and a decrease in accounts payable-trade. Offsetting this, we had net borrowing on the floor plan component of our credit facility of $40.9 million. To manage our working capital, we monitor our cash conversion cycle for our technology segment, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”) minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our technology segment: As of June 30, 2022 2021 (DSO) Days sales outstanding (1) 61 61 (DIO) Days inventory outstanding (2) 30 13 (DPO) Days payable outstanding (3) (45 ) (42 ) Cash conversion cycle 46 32 35 Table of Contents (1) Represents the rolling three month average of the balance of trade accounts receivable-trade, net for our technology segment at the end of the period divided by adjusted gross billings for the same three month period. (2) Represents the rolling three month average of the balance of inventory, net for our technology segment at the end of the period divided by cost of adjusted gross billings for the same three month period. (3) Represents the rolling three month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our technology segment at the end of the period divided by cost of adjusted gross billings for the same three month period. Our cash conversion cycle increased to 46 days as of June 30, 2022, as compared to 32 days as of June 30, 2021. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DPO increased 3 days. Invoices processed through our credit facility, or the A/P-floor plan balance, are typically paid within 45-60 days from the invoice date, while A/P trade invoices are typically paid within 30 days from the invoice date. Our DSO remained the same at 61 days. The DSO for both June 30, 2022, and 2021, reflects higher sales to customers with terms greater than or equal to net 60 days. Our DIO increased to 30 days due to higher inventory balance. Inventory, which represents equipment ordered by customers but not yet delivered, increased 59.2% to $246.9 million as of June 30, 2022, up from $155.1 million as of March 31, 2022, due to ongoing projects with customers and supply constraints that lengthen the time over which we receive all the parts in an order for a completed delivery to our customers. Financing segment : For the three months ended June 30, 2022, our financing segment provided $1.7 million from operating activities, primarily due to net earnings, decreases in accounts receivable, and increases in accounts payable-trade offset by increases in financing receivables-net. In the three months ended June 30, 2021, our financing segment provided $0.8 million from operating activities, primarily due to earnings offset by decreases in accounts payable-trade. Cash flows related to investing activities : For the three months ended June 30, 2022 , we used $1.7 million from investing activities, consisting of $1.8 million for purchases of property, equipment and operating lease equipment offset by $0.1 million of proceeds from the sale of property, equipment, and operating lease equipment. In the three months ended June 30, 2021, we used $6.2 million from investing activities, consisting of $7.0 million for purchases of property, equipment and operating lease equipment offset by $0.8 million of proceeds from the sale of property, equipment, and operating lease equipment. Cash flows from financing activities : For the three months ended June 30, 2022, cash provided by financing activities was $31.1 million, consisting of net borrowings of non-recourse and recourse notes payable of $45.6 million, partially offset by $7.2 million in cash used to repurchase outstanding shares of our common stock and $7.3 million in net repayments on the floor plan component of our credit facility . In the three months ended June 30, 2021, cash provided by financing activities was $35.5 million consisting of net borrowings on the floor plan component of our credit facility of $40.9 million partially offset by net repayments of non-recourse and recourse notes payable of $1.6 million, and $3.8 million in cash used to repurchase outstanding shares of our common stock. Our borrowing of non-recourse and recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. When the transfers do not meet the requirements for a sale, the proceeds paid to us represent borrowings of non-recourse or recourse notes payable. Non-cash activities : We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. As a condition of these agreements, certain financial institutions may request that the customer remit their contractual payments to a trust, rather than to us, and the trust pays the financial institution. Alternatively, the customer will make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender. However, when our customer makes payments through a trust, such payments represent non-cash transactions. Also, in certain assignment agreements, we may direct the third-party financial institution to pay some of the proceeds from the assignment directly to the vendor or vendors that have supplied the assets being leased and or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions. 36 Table of Contents SECURED BORROWINGS – FINANCING SEGMENT We may finance all or most of the cost of the assets that we finance for customers by transferring all or part of the contractual payments due to us to third-party financing institutions. When we account for the transfer as a secured borrowing, we recognize the proceeds as either recourse or non-recourse notes payable. Our customers are responsible for repaying the debt from a secured borrowing. The lender typically secures a lien on the financed assets at the time the financial assets are transferred and releases it upon collecting all the transferred payments. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk and their only recourse, upon default by the customer, is against the customer and the specific equipment under lease. While we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all. CREDIT FACILITY – TECHNOLOGY SEGMENT We finance the operations of our subsidiaries e Plus Technology, inc., e Plus Technology Services, inc. and SLAIT Consulting, LLC (collectively, the “Borrowers”) in our technology segment through a credit facility with WFCDF. The WFCDF credit facility has a floor plan facility and a revolving credit facility. On October 13, 2021, the Borrowers amended, restated, and replaced in their entirety their then-existing credit agreements with WFCDF. The new credit facility is established by a syndicate of banks for which WFCDF acts as administrative agent and consists of a discretionary senior secured floorplan facility in favor of the Borrowers in the aggregate principal amount of up to $375 million, together with a sublimit for a revolving credit facility for up to $100 million (collectively, the “2021 Credit Facility”). Please refer to Note 7 “Credit Facility and Notes Payable” to the accompanying Consolidated Financial Statements included in "Part I, Item 1. Financial Statements" for additional information concerning our 2021 Credit Facility. The loss of the 2021 Credit Facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process. Floor plan facility : We finance most purchases of products for sale to our customers through the floor plan facility. Once our customer places a purchase order with us and we have approved their credit, we place an order for the desired products with one of our vendors. Our vendors are generally paid by the floor plan facility and our liability is reflected in “accounts payable—floor plan” in our consolidated balance sheets. Most customer payments to us are remitted to our lockbox accounts. Once payments are cleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. We pay down the floor plan facility on three specified dates each month, generally 30-60 days from the invoice date . Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements of cash flows. As of June 30, 2022, and March 31, 2022, we had a maximum credit limit of $375.0 million, and an outstanding balance on the floor plan facility of $138.0 million and $145.3 million, respectively. On our balance sheet, our liability under the floor plan facility is presented as part of accounts payable – floor plan. Revolving credit facility : The outstanding balance under the revolving credit facility is presented as part of recourse notes payable- current on our consolidated balance sheets. Our borrowings and repayments under the revolving credit facility are included in “borrowings of non-recourse and recourse notes payable” and “repayments of non-recourse and recourse notes payable,” respectively, within cash flows from the financing activities in our consolidated statements of cash flows. 37 Table of Contents As of June 30, 2022, the outstanding balance under the revolving credit facility was $40.0 million. As of March 31, 2022, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $100.0 million as of both June 30, 2022, and March 31, 2022. PERFORMANCE GUARANTEES In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for these guarantees in the event of default in the performance of our obligations. We are in compliance with material performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations. OFF-BALANCE SHEET ARRANGEMENTS As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements, or other contractually narrow or limited purposes. As of June 30, 2022, we were not involved in any unconsolidated special purpose entity transactions. ADEQUACY OF CAPITAL RESOURCES The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also open offices in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance the platform of bundled solutions to provide additional functionality and value-added services. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivables due from our customers. These actions may result in increased working capital needs as the business expands. As a result, we may require additional financing to fund our strategy, implementation, potential future acquisitions, and working capital needs, which may include additional debt and equity financing. The impacts of COVID-19 may limit or eliminate our access to capital. While the future is uncertain, we do not believe our credit facility will be terminated by WFCDF or us. Additionally, while our lending partners in our financing segment have become more discerning in their approval processes, we currently have funding resources available for our transactions. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, or our major customers or vendors. Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to the worldwide impacts from COVID-19, currency fluctuations, reduction in IT spending, shortages of product from our vendors due to material shortages, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio to a lessee or third-party at the expiration of a lease term or prior to such expiration, and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which the sale occurs and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “ Risk Factors ,” in our 2022 Annual Report, as supplemented in subsequently filed reports, and in Part II, Item 1A. “ Risk Factors ” in this Report. 38 Table of Contents We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.